As we enter a new year, one of the areas that remains most pressing in our industry, and one that could see significant progress this calendar year is, Banking Reform.
In May, the SAFE Act banking provisions were passed in the House of Representatives as apart of the HEROES Act Covid-19 relief bill, and now, a change in control of the Georgia Senate this week could clear the way for the passing of the Secure and Fair Enforcement or “SAFE” Act, an Act that would finally allow cannabis companies in states where medical and adult use commerce is legal, to have access to standard banking within their state.
What is the SAFE Act?
For context, up until this point, cannabis touching companies such as dispensaries, cultivators and ingredient manufacturers have not been allowed to utilize federally insured banking institutions to operate their businesses due to the plant's arcane schedule 1 narcotics classification. Operators have been largely forced to work in a cash intensive environment, making it an exceptionally difficult task to gain access to many of the “normal” sources of capital widely available to “normal” businesses like loans, mortgages, and the ability to accept credit/debit card payments.
The SAFE Act is essentially a bill looking to allow Cannabis touching companies the opportunity to utilize standard banking systems within the states in which they are operating.
How the SAFE Act is Driving Cannabis Banking Reform Forward?
For the cannabis industry as a whole, banking reform will be a metaphorical 'Dam-Breaking' moment. With cover provided by legislation, FDIC insured banks can afford to bank cannabis affiliated companies without the stringent and preventative requirements and regulations currently imposed by the Controlled Substances Act of 1970.
The Impact Passing the SAFE Act Will Have on the Cannabis Industry
Increased participation from currently sidelined limited partners will be seen within the industry as operators gain access to traditional banking capabilities. Further enhanced merchant and credit capabilities for all forms of business transactions would streamline operations while reducing unwanted risk exposure associated with cash-heavy industries improving the cost of capital overall.
Access to capital
Not only would cannabis companies be able to bank their business utilizing the services available to other standard commercial businesses, but a passing of the SAFE Act would also open the flood-gates for potential investment opportunity in terms of both receiving commercial loans, mortgages and standard business loans, but it would also be a meaningful step towards attracting the large capital pools available from larger, more established Institutional Investment firms.
Aside from preventative vice clauses that exist in most investment charters, many institutional investors have steered clear of placing capital in cannabis touching companies for the simple reason that standard banking and the associate protections are not available to these companies. In addition to that, investment also comes hand-in-hand with liability, meaning that if these companies invest, they could be held responsible if the federal government chose to come after the company since they are affiliated with a business that is technically “federally illegal”.
These legal risks have prevented much of the available capital from investing up until this time even in the face of the potentially outsized returns available today. The SAFE Act could change that; and it could mark a monumental shift in the availability of capital to cannabis companies.
What Current Industry Operators Should be Doing to Prepare for the Inevitable?
Companies that fit this criteria should be paying very close attention to the way that this act works its way through our legislative system, because if/when it passes, new sources of capital will immediately be made available to the industry; and when it does, operators better be sure they have both their ducks in a row as well as a clear understanding of their unique value proposition.
Here are a few tips for separating your business from the rest:
Get your company records up to date and organized. This includes but is not limited to; operating agreements, shareholders agreements, current capitalization table and up to date financials for the business
In order to substantiate IP asset value, document and define all procedures within a quality management system to meet the desired target level of compliance.
Update your execution, sales, marketing and revenue plans to reflect the current conditions and opportunities in front of the business today, not those of yester-year